Yuan Devaluation: Is it Manipulation?
Definitions of currency manipulation are vague, little enforcement frameworks exist, so does it matter?
China made the news recently (surprise!) for announcing at a meeting of the Group of 20, that deliberately weakening the value of yuan is and will not be part of their current economic strategy. This was welcomed news for the United States and other anxious investors and trading partners.
But, this raises the question–has deliberate currency devaluation or, “manipulation” as some may call it, been China’s strategy in the past? And, was it what fueled the recent decades of tremendous economic growth in China? If China wasn’t guilty of it in the past, then why the need to make such a declaration today?
That question is not so easy to answer and is one that reasonable economists and people continue to disagree on.
Take for example this opinion piece in the Wall Street Journal by Tuck School of Business dean, Matthew Slaughter. Slaughter argues that currency devaluation is a legitimate tool of the central bank and to “label as manipulation the conduct of monetary policy itself betrays a fundamental confusion about the operation and goals of central banks.”
Yet, Donald Trump asserts that China is purposefully playing dirty by manipulating its currency with the intention of gaining an unfair trade advantage over the U.S.
Did I say reasonable people? Ok, maybe Tyler Cowen of George Mason University is a better example of a reasonable person with a different view than Slaughter. He makes a compelling case that explains how China fits the mold of an economy that used currency manipulation to reap benefits—albeit maybe artificial and short-term, in hindsight.
The bottom line: arguing over the definition of currency manipulation and determining if China engages in these practices is not important, nor is it particularly constructive.
As a member of the International Monetary Fund (IMF), China is technically committed to refraining from manipulating their exchange rates for the purpose of gaining an unfair trade advantage. Violators risk losing membership, funding, and voting rights. To date, the IMF has never labeled China or any other country as a currency manipulator.
There may never be an effective policy framework in place to identify or address currency manipulation. The Trans-Pacific Partnership (TPP) includes a provision that reaffirms commitments to avoid currency manipulation and increase transparency on currency interventions—but it has no enforcement mechanisms.
U.S. Treasury Secretary Jacob Lew responded to China’s recent declaration that it would not actively devalue the yuan by saying that it is critical that China’s exchange-rate policy be transparent and that Beijing “clearly communicate its actions to the market.”
Regardless of what side of the argument one is on, the important thing is understanding the mechanics of currency exchange rate fluctuations and its consequences—and preparing for such challenges. For now what you can count on from China is that the value of the yuan will fluctuate. What you can hope for, is more transparency from the Chinese government—but I wouldn’t count on it!